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# Why We Like Per Aarsleff Holding A/S’s (CPH:PAAL B) 14% Return On Capital Employed

Today we are going to look at Per Aarsleff Holding A/S (CPH:PAAL B) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

### What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

### So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Per Aarsleff Holding:

0.14 = ø499m ÷ (ø7.6b - ø4.0b) (Based on the trailing twelve months to March 2019.)

So, Per Aarsleff Holding has an ROCE of 14%.

### Does Per Aarsleff Holding Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Per Aarsleff Holding's ROCE is meaningfully higher than the 10% average in the Construction industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Per Aarsleff Holding sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

You can see in the image below how Per Aarsleff Holding's ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Per Aarsleff Holding.

### What Are Current Liabilities, And How Do They Affect Per Aarsleff Holding's ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Per Aarsleff Holding has total liabilities of ø4.0b and total assets of ø7.6b. Therefore its current liabilities are equivalent to approximately 53% of its total assets. Per Aarsleff Holding's current liabilities are fairly high, which increases its ROCE significantly.

### The Bottom Line On Per Aarsleff Holding's ROCE

While its ROCE looks decent, it wouldn't look so good if it reduced current liabilities. There might be better investments than Per Aarsleff Holding out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like Per Aarsleff Holding better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.